Trust lies in reduced supply around the world. This is true among countries, business partners and securities dealers. In the market, we can measure this distrust of the different prices of similar financial assets that are ultimately backed by the U.S. federal government.

Take, for example, the interest rates the Fed pays banks, which keep their funds virtually risk-free in their “reverse repo facilities.”

The Fed has been engaged in reverse repos for years, in which it receives cash overnight, backed by the highest quality short-term securities, in exchange for “reserves,” a non-transferable asset for financial institutions .

But institutions and investors have other low-risk options for idle cash, such as short-term Treasury bills. In fact, there is an oddly persistent gap between the Treasury bill rate and the periodic reset rate offered by the RRP.

For example, on March 23, four-week Treasury bills once yielded about 13 basis points (100 percentage points each), while the RRP offered 30 basis points. In the past, the market did not price the difference between them.

If this propagation happened due to a strange event—perhaps a massive computer failure during the day—it might be considered noise, not a signal. However, the discrepancy has persisted since June last year. Both RRP and Treasuries provide daily liquidity, and the full trust of the federal government backs both. So why are these yield differences?

Part of the idea behind the RRP concept is to assure bank customers and money market funds held by companies that they will always receive low, but at least positive, interest rates on these safe RRP accounts. Ensuring this sense of security for account holders is critical. Without this protection, public confidence in the system as a whole is shaken.

The fundamental problem is that banks and other deposit-takers, such as money market funds, have not found enough reliable borrowing or investment opportunities for the excess cash provided by quantitative easing programs. Beginning with the pandemic in early 2020, demand for loans in the U.S. weakened to the point where bank customer deposits didn’t work like the normal banking model.

Regular use of “RRP” began in 2014, and there was a time when the Federal Reserve (and its customers) used it only on demand. But the repurchase mechanism has grown in importance, especially over the past two years. No participant in the RRP can bid less than $1 million or more than $160 billion on a daily basis.

The facility is increasingly popular with institutions that end up with more cash each day than attractive short-term, low-risk opportunities. For example, on April 4 this year, the overnight suggested retail price was $1.73 trillion.

So, given the Fed’s support for such accounts, why would people be willing to pay (and get less yield) for short-term Treasury bills when they might be earning twice as much with RRP?

The biggest reason, in my opinion, is that these Treasury bills are probably more useful. Investors or dealer banks, after purchasing them, can lend and re-lent these securities multiple times before they mature. This is a process sometimes called “rehypothecation.”

Every time the institution that holds the note lends it, it earns a “securities lending fee.” The flexibility of these Treasury bills to provide collateral security has made them a popular tool used in typical fixed-income market transactions. Interest rate swaps, in which two parties exchange different streams of income paid over different time periods, may use Treasury bills as collateral in the transaction.

In contrast, while RRPs may offer higher interest rates, they are not instruments that can be lent out again, unlike Treasury bills.

This “collateral market” is an important and undervalued aspect of the international financial system. Manmohan Singh, senior financial economist at the International Monetary Fund, is the leading expert on the subject. His research shows how the use of collateral can indicate market health.

When financial market participants have a lot of confidence in each other, “collateral reuse,” or the number of times Treasury bills (or German bunds) are lent and re-lent, increases. In the lighter days of 2007, Treasury bills may have been reused as many as three times. By 2016, the reuse rate (an inverse measure of trust) had dropped to 1.8x. Reuse of collateral has picked up again in recent years.

Now, though, the persistent interest rate gap between RRP and short-term notes tells us that there is a new scramble for the best collateral. This shows that financial counterparties trust each other and the quality of their assets less and less.